India's K-shaped consumption pattern continues post pandemic

The underlying recovery in consumption growth in India post the Covid-19 pandemic remains uneven in terms of discretionary spending versus consumer staples, the rural-urban divide, and affluent versus broad-based household demand, according to UBS.

Within the consumption basket, while the premium segment demand including SUVs and luxury cars and home sales (above ₹1 crore) and expensive smartphones (above $300) seem to be doing well, demand for entry-level and mass-market goods entry-level car demand, two-wheeler sales, affordable housing (less than ₹50 lakh) has been muted post the pandemic, the Swiss financial services giant says in a research report.

India's consumption story reflects a significant divide, driven by a resilient economy but characterised by a stark contrast in spending patterns, says UBS India economist Tanvee Gupta Jain.

"Despite India's trajectory to become the world's third largest consumer market by 2026, the divergence between affluent and broad-based household demand persists, accentuated by factors such as income inequality, increased consumer credit access, and declining household savings," says Jain.

Key reasons for this dichotomy, despite resilient economic momentum, include income continuity at the top of India's income pyramid during the pandemic versus the bottom, says UBS. Limited fiscal support for vulnerable sections of society amplified the gap, it says.

Excluding mortgages, leveraging up by households aided consumption and explains a fifth of the past three years' private consumption growth, the report says. It also cites lower household savings partly due to weaker incomes, a higher tendency to consume by young people, changing consumer preferences and rising debt service obligations with household debt at a 15-year high.

The top of India's income pyramid had income continuity during the pandemic versus the bottom, says UBS. During the pandemic, income levels for the top of India's income pyramid were largely supported. Corporate wages were up 14% during FY23 versus 9% during the pre-pandemic period. On the contrary, growth in rural wages was largely muted at 5-7% year-on-year during this period. Adjusted for inflation, real rural wages were down 1.3% during FY23, says UBS.

At the same time, limited fiscal support for vulnerable sections of society during the pandemic amplified the gap, it says.

UBS says the declining savings funding consumption has run its course considering the inadequate social safety net in India. “We estimate that household savings would remain below 20% of GDP in FY24, even after the spurt to 22.7% of GDP during FY21 (pandemic driven precautionary savings),” it says.

Households in India are generally saving less partly due to weaker incomes or a greater tendency to consume and also rising debt service obligations due to higher financial liabilities, says UBS. “With household debt rising to a 15-year high in FY24E, we estimate that household debt service obligations would rise to 7.6% of disposable income in FY24 from 6.7% in FY23,” it says.

The investment bank expects real household consumption growth to remain below trend at 4-5% in FY25/26E. This compares with 6.5-7% average growth during FY11-20.

While urban mass-market demand should remain modest on softening corporate wage growth, flattening personal loan growth and the lagged impact of monetary tightening, UBS expects the premium segment to continue to do well. Rural consumption could recover on hopes of normal monsoons, the likely removal of export bans for agricultural commodities as inflation eases, and the much anticipated capex recovery with construction being the largest generator of jobs outside of agriculture, it forecasts.